Mexico's banking reforms aim to boost access to credit

Analysis

Despite occurring a quarter of a century ago, Mexico’s financial crisis of 1994-95 continues to cast a long shadow over the sector. As consumer and business confidence collapsed, so did bank credit as a share of GDP. Bankers and their regulators adopted and promoted much more conservative lending practices, resulting in many consumers and smaller businesses being locked out of the formal financial sector. At the same time, economic growth over the past two and a half decades has slowed significantly, meaning that progress on reducing poverty and inequality has been relatively limited. Given that almost half of the population live in poverty, it is perhaps not surprising that a similar proportion do not own a bank account. According to the National Council for the Evaluation of Social Development Policies, the number of people living in poverty was 53.4m, or 43.6% of the total population, in 2017.

The economic context has also made it more difficult for smaller businesses to access financing. “In order to access to credit in Mexico, small and medium-sized enterprises (SMEs) have to overcome several challenges,” Carlos Serrano, chief economist at BBVA México, told OBG. “First, there is the problem of demand. Some 60% of SMEs do not want or do not request credit because many are informal and cannot prove their eligibility to be granted credit by a traditional bank, or they do not need to access further funds because they do not have specific business expansion or growth goals. Second, the system lacks adequate formalisation mechanisms that have longer transition periods, through which SMEs could adapt to fiscal changes and bear the costs associated with formal activity.”

Bank Penetration

According to the third National Survey of Financial Inclusion, published in June 2018, the proportion of the adult population with a bank account improved moderately, rising from 44% in 2015 to 47% in 2018, as did the proportion of the population with a loan, from 29% to 31%. Similarly, the share of the population with one or more financial products, including a bank account, increased marginally over the same period, from 68% to 69%. Meanwhile, the share of the population with an insurance product remained stable at 25%, while the share with pension savings declined, from 41% in 2015 to 40% in 2018.

Gender & Regional Disparities

Financial inclusion differs by gender and, in particular, across regions. Nationally, 48% of men had a bank account in 2018, compared to 46% of women, according to the National Survey of Financial Inclusion. In both Mexico City and in the south of the country, more women than men had a bank account, while significantly more men than women had an account in both the north-east and Bajío regions. Women (42%) are more likely than men (36%) to have a bank account in small towns and rural areas with a population of less than 15,000 people, while men (55%) are more likely than women (48%) to have a bank account in localities with a population greater than 15,000 inhabitants. In general, financial inclusion is stronger in the more developed north of the country (six in 10 inhabitants in the north-east region had a bank account in 2018) compared to the less-developed south (five in 10 people), and the south-central and eastern regions (four in 10 people).

Lending

According to the World Bank, domestic private sector credit as a share of GDP remains some way short of its 1971 peak of 34.1%. After a decade of economic crisis, the credit-to-GDP ratio bottomed out at 11.2% in 1988 before accelerating to 30.9% in 1994 amid weak regulation on lending. The ratio fell again following the 1994-95 financial crisis, reaching a nadir of 11.6% in 2001. With a stronger regulatory framework in place, the subsequent growth in credit was more measured, reaching a peak of 26.9% in 2017, before dipping slightly to 26.8% in 2018 amid weakening economic activity and higher interest rates. By comparison, this is less than half of Brazil’s 61.8% in 2018 and less than one-third of Chile’s 81.3%. To a large degree, the level of credit penetration across the country reflects the wide regional divergence in economic development. As of March 2019 there was an average of 5635 credit contracts per 10,000 adults across Mexico. However, this varies from a high of 12,978 per 10,000 adults in Mexico City to 2852 in Chiapas.

Institutional & Policy Reform

Recognising the importance of a strong and deep banking sector to both economic development and social inclusion, successive governments have introduced initiatives to promote financial inclusion as a matter of national priority. In 2011 the National Council for Financial Inclusion (Consejo Nacional de Inclusión Financiera, CONAIF) was established by presidential decree. At the time of the 2014 financial reforms, CONAIF was put on a firmer legal footing, and charged with the development and implementation of the National Policy for Financial Inclusion. Published in June 2016, the policy was developed around six axes: financial education, technological innovation, financial infrastructure, greater access for the underserved population, greater consumer confidence through consumer protection measures, and the generation and collection of data to measure progress.

To complement the National Policy for Financial Inclusion, in 2017 the government launched the National Strategy for Financial Education, which focused on financial attitudes and behaviour, financial literacy, and relations with financial institutions. Its core premise is that financial education and financial inclusion are inextricably linked.

More recently, the current government proposed a restructuring of a number of state development banks to better promote financial inclusion among smaller businesses and low-income households as part of the National Development Plan 2019-24. Following this, in mid-2019 the authorities announced a package of new financing measures through public institutions to promote access to credit in targeted segments of society. For example, from August 1, 2019, 1.2m of workers are eligible for overdraft loans with reduced interest rates (between 16% and 22%) via the National Fund Institute for Workers Consumption. In a parallel measure, since early September 2019 the Federal Mortgage Society, a government mortgage agency, offers mortgage loans to individuals who earn their incomes from a mix of formal and informal sources, allowing them to purchase a new or second-hand house up to a value of MXN1.5m ($77,600).

The government is also focusing on boosting access to credit for SMEs. In August 2019 two Mexican development banks, Nacional Financiera (NAFIN) and Bancomext, in conjunction with the Jalisco government, launched the third stage of a MXN271m ($14m) SME financing programme. The initiative plans to extend new lines of credit to help more than 130,000 SMEs and 370,000 micro-enterprises. To spur development in rural regions, the Trust Funds for Rural Development, a collection of four public financing vehicles, is expected to support 500,000 agri-food producers in the south and south-east regions of the country with financing of MXN50m ($2.6m). For its part, NAFIN is aiming to ease access to credit for smaller companies bidding for public procurement contracts, such as for Petróleos Mexicanos, while Bancomext is pursuing sectoral initiatives in energy and mining.

Pace of Progress

While there has been some progress towards financial inclusion over the past decade, the rate of improvement has slowed in more recent years. One of the biggest barriers to consumers and small businesses accessing credit remains the predominance of informality. Progress on reducing the informal business landscape has been slow, and it is expected to face further obstacles as the economic slowdown reduces both the rate of formal job creation and the incentive for smaller businesses to formally register.

While credit deepening and technological innovation can be expected to underpin the development of the financial sector, this may have a limited effect, improving the range of financial products available to those who already have access to credit and financial services more broadly without necessarily fostering a nominal increase in financial inclusion. As is evidenced by the initiatives announced by the incumbent administration in mid-2019, the constellation of state development banks and other public financing institutions are considered important windows for boosting access to credit in the years ahead. Equally crucial to the development of the banking sector will be the involvement of private sector players and the dynamism of their collaboration with state entities in the bid to boost financial inclusion among Mexico’s unbanked population.

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